top of page

Cause & Effect - Correlation vs. Causation

Perhaps you have heard the wonky term: correlation is not causality. It basically means we tend to take mental shortcuts (heuristics) to explain the relationship between seemingly linked events. My dear, 88 year old mom swears by Zija (correlation), the green, expensive nutritional drink. Nevermind, she eats well, exercises, doesn’t smoke and has longevity genes – she’s found her fountain of youth (causation). While I believethe Zija is beneficial, I doubt it’s incrementally better than a more thrifty One-A-Day. Take a peek at the graph below.  What does it tell you?

It told me Tyler Vigen has a lot of time on his hands. Granted, this example is a little absurd.  Consider this headline: “Employee Motivation Leads to Higher Corporate Profits”. Does it? Maybe people are motivated because the company is doing well and their bonuses are up?[i]  We’ve all heard that students get better grades if their homes contain a lot of books.

More likely, the student comes from educated parents, who value education and just happen to own a lot of old books. Speaking of which, parents become very suspectible to the idea of only the very best (expensive) university will breed success for junior. Colleges prey off this ‘elitist illusion’.  When in reality, the future success of the child is likely already governed by their time management, work ethic, ability to multi task, self determination, interpersonal skills and yes, some God given intelligence.  Successful grads of Princeton would likely be just as successful had they attended Rutgers.  Sure, your son’s friendship with Thurston Howell IV helped once the old man got stuck at sea. But that had little to do with Princeton’s B-School. I’ve recently tried a garden experiment.

I started to juice my annuals with a cocktail of Miracle-Gro, baby shampoo, corn syrup and beer[ii] After a few applications my babies have taken off. Shampoo + Beer = Blooms? Sure, there could be some pH soil enhancement.  But more likely, my obsessive fertilizing has been aided by warm, sunny weather and plentiful rains. I suppose if you test enough things, some will randomly correlate. We all fall victim to causality. But why? If we feel we understand a causal relationship, we can act with certitude.  If we can act with certitude, we can define our futures. And doesn’t everyone want to know what lies ahead?  You give me next week’s sport page and I’m packing a spare liver & heading to Vegas.  Short of a time machine, we tend to data mine old stats, trends & correlations.  Sell in May and go away?

This snappy market heuristic has gotten plenty of historical airtime. The results are actually mixed – dominated by a particularly poor stretch, 1964-1984[iii]. I suspect the middling returns have more to do with post-tax day refunds already invested, Wall Street vacationing in the Hamptons & quiet trading volumes - than the calendar simply turning a page. How we interpret information can become a function of seeing what we want to see. We love mental shortcuts. So if drinking flavored seaweed, selling stocks May 1st and owning a bunch of books will make me healthy wealthy and wise, count me in.    

[i] Rolf Dobelli, The Art of Thinking Clearly, Harper Collins 2013, p.111

[ii] Linda Hoeppner, mother-in-law, 2017.

[iii] Yale Hirsch, Stock Trader’s Almanac, 1999, page 52


bottom of page